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BG14 | FINANCE
BUSINESS GUARDIAN guardian.co.tt APRIL 27 • 2017
We can't just muddle through
UK Prime Minister Theresa
May's snap election call has
come as a surprise to many.
Seen as the final referendum
on the Brexit debate, it has
generated a lot of interest
across the international community. The
situation in the UK is also of relevance to us
here in T&T as we reflect on the path, state and
outlook for the UK economy and recognise the
parallels that exist here.
Following the Brexit vote last year there were
many predictions of challenges and, in some
cases, outright doom for the UK economy. It
was argued that cutting off key political and
economic relationships with mainland Europe
would have had a significant negative impact
on the UK economy.
The fact that this has not been the case---at
least to the extent envisaged---has embolden
some to argue that the Brexit move is not so
bad, with the view that much of the uproar was
the work of economists detached from reality
and politicians stirring up discord.
On the night of the Brexit vote the pound fell
11 per cent against the US dollar, represent-
ing the biggest intra-day fall. Once Brexit was
confirmed the currency fell to its lowest level
since 1985. This move added confirmation to
the proponents of doom and gloom immedi-
ately following the Brexit vote.
The truth is that the UK economy has held up
better than expected at least in the six months
following the Brexit vote. The reason put for-
ward is quite simple and it is more rooted in
human behaviour than any complex set of
formulas.
Following on from Brexit and the fall in the
pound, many in the UK---in anticipation of
tougher economic times---brought forward
their aggregate demand. More was spent before
the prices got higher or before they could no
longer afford to do so. The weaker currency did,
of course, provide some stimulus in the form
of tourism and manufacturing and all these
factors combined towards a better economic
performance to the end of last year.
Now the data is suggesting a slow down
going forward. The impact of the depreciated
currency means that inflation has risen and this
is negatively impacting household spending
power. As the Brexit reality becomes closer
at hand, business confidence has decreased.
Overall, this is reducing household spending
and general economic activity. The knock-on
effect: service sector will slow down.
Parallels
There is a distinct parallel between what has
happened in the UK and what has happened
in T&T.
Post September 2015 and the announcement
that "the treasury was empty" the public re-
action would have been keen to bring forward
demand to cater to this economic reality. In
anticipation of things getting harder and the
possibility of the currency depreciating people
sought to consume and acquire various items
now rather than later.
We saw this effect flow through into 2016
when motor vehicle sales, Carnival activities---
even the use of fireworks---all seemed to not
be affected to the extent envisaged and many
wondering whether T&T was really faced with
recession.
Now as we get to the middle of 2017 the
mood and climate is significantly different as
the brought-forward demand has now run its
course and there seems to be nothing behind
this in order to keep economic activity going.
The outlook for the UK is that consumer
spending on food, clothing, alcohol, tobacco
and other discretionary goods will decline as
a share of total spending. It is quite likely we
are experiencing the same in T&T now as the
consumer becomes more and more cautious.
Capital goods are also likely to decline as the
impact of persistent currency challenges cause
price increases due to scarcity or inflation,
sometimes even both.
The key take away from all this for T&T is
that we need to have a better understanding of
the drivers of individual behaviours in a post-
oil and gas world. If we are not in a position to
exploit energy resources and charge rents for
such to the same extent that we did before,
then the activity in the domestic economy be-
comes more relevant. Our ability to generate
tax revenues in order to fund our economic
needs and development programme is of vital
importance.
It is obvious when we think about it but
certainly not in the way we act. The domestic
economy is a function of the collective actions
of the population. If the mood of the popula-
tion is directed so that they act in a particular
manner then that is going to translate into the
domestic economic outlook.
Stimulus needed
Generally speaking, if you go through a pe-
riod of 12 to 18 months where the overarching
tone is for belt tightening then, at some stage,
either through coercion or necessity, that mes-
sage is going to take root. This in and of itself
means that consumer spending is going to
slow and there will be a knock-on effect on
everything from employment levels to receipts
of value added tax.
The key is to have some form of stimulus in
place post the 12 to 24 months of consolidation
so there will be a rebound in economic activity.
Without that you end up with a cycle of people
spending less, maybe even saving more. While
that may not be a bad thing, it is not without
consequences.
One major consequence is that it increas-
es the reliance on the State to spur economic
activity. This would be coming at a time when
the State is running out of fiscal space through
which to engineer an economic turnaround.
Our debt levels have been increasing at a
rapid rate and so the recent downgrade of our
credit rating is not unexpected. The fact that
our outlook has been rated as stable means
that our recent rating experience has probably
resulted in the best case scenario. However, we
can still expect an increase in borrowing costs
over time if these trends persist.
Notwithstanding this the stable outlook
seems based on a rebound in natural gas
production and, to some extent, an uptick in
natural gas prices. It means that over the past
18 months we have not advanced very much
by way of providing insulation from external
shocks.
We often tend to frame our economic discus-
sions within the context of the political cycle.
We reference post September 2015---or from
2010 to 2015---as if both the economic cycle
and political cycle changes hands at the same
time. Applying an iota of common sense to
the mix should help us to realise that is not
the case and, further, the economic cycle is
longer than the political cycle.
If one were to look at our economy from 2009
to present you would appreciate that we have
basically flatlined since the global economic
crisis and the collapse of CL Financial. That
should highlight the debilitating effect the
collapse and subsequent bailout of CL Finan-
cial and its subsidiaries have had on the local
economic landscape.
During this period---except for economies
chronically disabled like Greece---the rest of
the world has been able to rebound from the
crisis in some way form or fashion.
T&T has not only failed to achieve any kind
of escape velocity, but we have been steadily
eroding our economic buffers. After reaching
an unsustainable level of expenditure in 2008,
we cut expenses in 2009. And, for the first
time, we made no contribution to the Heritage
and Stabilisation Fund (HSF).
Since then, we have moved to increasing bor-
rowing to support expenditure levels, sought
to realise one-off revenue items and begun to
draw on the HSF. It means we are poorly posi-
tioned for the next crisis and it will be foolish
to think that there will not be another one.
If the developed world slips back into reces-
sion or there is some geopolitical event that
reduces economic demand then we will have
little wiggle room.
As members of our Economic Development
Board have articulated on many occasions, our
last 18 months should have been spent restruc-
turing our expenditure profile instead of simply
engaging in expenditure cuts.
Regardless of whether one agrees with this
position it should be clear that for the next 24
to 36 months, we have to engage in significant
and targeted stimulus measures in order to en-
gineer an economic turnaround beyond simply
relying on rebounding oil and gas to save us.
We are running out of fiscal space and if we
attempt to simply muddle through then I sus-
pect in the long run we will be found wanting.
Ian Narine can be contacted via ian.narine@
gmail.com